Blog Stats

Posts Tagged ‘properdee’

I’ve discussed before on this blog, what the differences are between America Churchianity and British Churchianity. I can’t think of a better example of why separation of church and state is a good thing, a thing invented by Christians than this little gem by the perspicacious Martin Turner:

“Richard Dawkins’s followers will no doubt be quick to claim this is another example of the heinous effect of ‘the God delusion’. But they would be wrong. Under charity law, the Church of England has to diligently pursue all of its debtors, and, coupled with the laws on ‘chancel repair liability’ which date back to Valor Ecclesiasticus in 1535, they have no choice.

<snip>

What lunatic changed the law in that way? (You know the answer to this one, but, in case you don’t, the legislation is the Land Registration Act 2002.)

Since the Church of England is powerless to extricate itself from a situation which bankrupts ordinary people and brings the church, and thus the entire Christian faith, into disrepute, the government ought to have intervened to simply cancel chancel liability. This would free the Church of England to pursue grants and even Lottery money. This is in fact what the Law Commission and the Church of England Synod recommended in the 1980s.”

At the time when this hit the headlines I was not aware of these facts. I’m glad I reserved my judgement.

“The place is full with slightly mad people, to say the least. Not a dangerous kind of mad, just weird kind of mad. The fact that a crash might not occur is simply beyond their comprehension. It’s pretty odd how people can be so ignorant towards possibilities. I don’t think there will be a crash per’se, but I wouldn’t laugh or disrespect anyone who thinks there is going to be one.“

Which reminds me, I just refused to pay rent rise to my landlord for the second time in 6 months. Ho hum, I guess we’ll be looking at a bigger place for the same amount of money anyway come summertime. The lettings agent is practically begging now (they’ve bolloxed all the paperwork, something tells me they stand to lose a large amount of money soon).

“This MP basically said that they’re creating an inflationary environment… 15% interest rates, not this year, but over the next 3 years”

Make of it what you will, personally it tells me that everyone in the know is aware of what is coming next and what is needed, but for some reason Flash Gordon and Alistair Darling are out of the loop or didn’t get the memo. It’s also becoming clear that Flash is intending to pull a Zimbabwe and start printing money (he calls this “quantitative easing” – which is another fancy financial bullshit term for printing money).

You see there is only two ways out of a recession, inflation or raising interest rates. You should know what happens when the government uses inflation, it’s been done before by the Weimar Republic and more recently Zanu-PF.

But what about the other tool, interest rates? Well, you see, this would cause millions of feckless, leveraged, mewing borrowers to realise the difference between debt and wealth – can’t have that, or can we?

The fact is we’re dangerously close to the edge of falling into hyperinflation and while its difficult to predict how disastrous this would be we do know that fixed loans would be eroded away, but so would the value of GBP, the value of any savings and investments too (you know, the things used to fund borrowing) – basically our ecomony would become worthless and most likely we’d all end up informally adopting the Euro.

So why does Flash want to print money? There can only be one of three conclusions, either he…

Has engineered this, in part, on purpose. The most far reaching conclusion however I can’t help but wonder if he was hoping for a bust sooner, so that it would damage Bliar (and oust him out of office), or even, guessing (or feeling) he will lose an election soon, hoping to pass the bubble on to the Tories just before it burst (securing a short term for them, allowing him to be elected back into power at the next election). Far reaching but not inconceivable – considering all the warnings he has ignored over the 10 years he was Chancellor.

Whatever the reasons for his contempt of savers, the UK economy and the poor, all his actions are delaying the inevitable (and making it worse)… depression and potentially more civil unrest.

This one is simple so it’s going to be a relatively shorter than my previous articles. Up till now, you could simply assume I’m a bitter late 20’s Gen-XYer who is sounding off due to not being able to get on the housing ladder. But don’t just take it from me, take it from property millionaire Robert Kiyosaki, to show you why the home you live in is not an investment.

Let’s start by getting a definition of investment:

“An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.” – Answers.com

Wouldn’t a home fall under that description?

We need to be clear what we are referring to. A house, can be an investment, since you can purchase a house as an asset and sell it later at a profit (or loss depending on the market). A home however, is not the same as a house. A home is something you live in. You can change homes, but you can’t really sell your home unless you intend to be homeless.

Of course, you may argue, people make profit on their homes when they appreciate.

This ‘profit’ is only made when the home comes to be sold, and unless you choose to move into a home that is smaller (ie. of less value) the ‘profit’ is not going to be realised as it is invested into the new house of equal or higher value. This is further backed up by the dictionary definition of profit:

An advantageous gain or return; benefit.

The return received on a business undertaking after all operating expenses have been met.

The return received on an investment after all charges have been paid. Often used in the plural.

The rate of increase in the net worth of a business enterprise in a given accounting period.

Income received from investments or property.

The amount received for a commodity or service in excess of the original cost.

Therefore profit is what you have left over when you have met all expenses. Profit is not increase, it is less costs. Profit is what you get to take home to spend on whatever you like.

Robert Kiyosaki, the author of Rich Dad, Poor Dad, further defines your home as a liability:

In “standard” accounting, if you buy a house, you consider it an asset. However, from a cash-flow perspective, if you have to make mortgage and property tax payments, while the house produces no income (i.e., it causes a negative cash flow), the house is a liability. Anything that produces income is an asset; anything that incurs expenses is a liability. – Basic Money Skills

Don’t jump on the housing wagon thinking you can sell if it gets tough. When interest rates rise it will be difficult to sell your house for a ‘profit’ because many others will be trying to do the same thing. The best advice for FTB is to hold out for lower prices. If you’re offer is not 30% lower than the asking price, then it’s not low enough. Meanwhile renting gives you the opportunity to walk away from bad deals. It also frees you up to leave your current property if the rent is too much.

In the previous Housing Market Myths post, I presented facts, figures and observations proving that house prices do not always rise, and in fact overall house prices rise in cycles or peaks and troughs as it were.

I am now going to demonstrate practically why low interest rates have been bad for the economy, home owners and naive or amateur investors.

The last property crash in the UK saw interest rates rise to record levels of up to 15.40% (1 Mar 1990 – AWD Moneyextra). Despite many bankruptcies and repossessions, high rate was nothing new. Just has house prices have always spectacularly risen and spectacularly fallen, so have interest rates in the UK:

UK Interest rates, as can plainly be seen, hit their low in 2003, anyone who bought in 2003 at the bottom will be feeling the heat of a 2.0% rise (over 50% increase in their interest payments) more than recent lemmings buyers. Not only that, the future does not look good according to recent news reports.

Regardless of whether the rates rise or not, it is important to realise the effects of low interest rates on the economy and especially on the psychology on average potential house buyers. I’m going to start by making an arrogant but informed blanket statement about people in the UK:

It’s easy to see where this perception comes from. If you’re going to take out a loan for £300,000 for 25 years at a rate of 5% then your monthly payment is going to be lower than the same deal at a 10% rate of interest. People see low rates, then they think to themselves “I can afford this”, so what happens is everyone rushes to get this loan. Thus the market is actually pushed up, as the stock gets lower, the prices go up.

This kind of bubble can be corrected easily: by raising interest rates, making the loans less attractive, which in turn lowers the price of the stock as demand falls.

Unfortunately, this is where the UK government (and specifically the current Chancellor of the Exchequer: Gordon Brown) and the MPC, have done recent homeowners a great injustice. Instead of taking control of house prices by raising interest rates before the prices went astronomical, Gordon pressed ahead with his unachievable 2% target and they continued to try and keep the base rate low. As more sheeple took advantage disadvantage of the lower rates, prices continued to spiral upwards, and more people were priced out. Those who have stretched themselves to the limit in borrowing leave themselves vulnerable to very small rate changes. As the interest rate creeps up half a percentage, they start to find themselves struggling to meet bills and basic necessities, until they bail out by declaring bankruptcy.

Low interest rates are not only bad for increasing the risk and level of personal debt, they are bad for savers. So even people who are financially astute are punished because they get little reward for their hard work.

It’s pretty clear that if interest rates ever hit 15% again, that many people are going to find themselves in a lot of trouble. But there are a number of groups that will benefit including:

Seasoned property investors (who will be able to buy at rock bottom prices)

Tenants (Who can still choose where to live, and can rent from the group above)

Savers (Those who have more in equity than they have in debt)

First time buyers (buying at rock bottom of the cycle)

Commercial industry (customers are be able to afford quality and luxury goods again)

Employees (higher wage increases)

Higher interest rates discourage borrowing and encourage saving. If less people are taking out mortgages, less people are seeking to buy housing. All it will take is a bit of seller panic to set in and it will drop like sack of potatoes. Even if sellers hold on, the market will stagnate before dropping more slowly whilst waiting for wages to catch up.

This is the maths part…

This section edited in red, thanks Emily (comments)!

Let’s imagine a house that is worth £300,000 at present.

You take out a 100% mortgage at a rate of 6% over 25 years

This gives you a monthly payment of Â£1,956.00

The total cost of your house is: £1956 * (12 * 25) = £586,800 (a 97% increase of original price)!

Now let’s imagine interest rates rise to 15%, bringing the value of the same property down to £100,000. If you took out the same 25 year deal your costs would be:

£100,000 at 15% for 25 years

Monthly payment of £1289.00

Total cost of your house: £1289 * (12 * 25) = £386,700 (a 287% increase BUT almost £200,000 less than the same property bought at £300k at 6% interest)!

Since you know you can afford the original £2000 monthly payment, we can actually lower the term for repayment of the original mortgage (which should be the objective, low house prices, smaller mortgages):

£100,000 at 15% for 10 years

Monthly payment of £1660

Total cost of your house: £1660 * (12 * 10) = £199,200!

Therefore high interest rates actually prevent growth in borrowing, create affordable housing and allow people to either pay off their mortgages faster and/or lower the rate of their monthly payments.

With lower monthly payments you have more room to maneuver around interest rate hikes, or with a smaller term, the effects of a rate hike are not going to be long term. It is also far easier to pay off £100k at a high interest rate than £300k at a low one, with high interest your money also goes to further and if rates then fall you are also going to do even better. (However if rate falls lead to high inflation it will take a while for your wages to catch up, in that time price of goods and services increases and you find the power of your money limited.)

So why doesn’t this happen in the real world? Herd mentality is one explanation. Back in the late 90’s/early 00’s everyone was beginning to learn how investors make money from property and wanted a go at it themselves. The problem is they didn’t know the first rule of investing.

The result was that many buy-to-let’ers found they had to reduce their rental rates to compete with the flood of rental properties on the market. At the same time, many newbies who bought a ridiculously priced property found that the rent was not enough to cover their mortgage repayments. The real winners are those that have sold to rent or who have been in the game a long time.

What happens next?

Many will quote that overused byline that the government won’t let it happen. Well guess what? The government (Gordon Brown) turned over control of interest rates to the MPC 10 years ago. This means that if things get out of control, the MPC will be used as the scapegoat. There is nothing to suggest in history that governments have been able to control inflation and there is nothing to suggest that they can control it now. The only tool that they have, outside ofintroducing new regulations to cap prices or forcing home-owners to lower their prices, is the base rate, which they can either lower or raise.

EDIT: Thanks Ian (comments)If everyone learned this basic economic principle then sellers would be forced to haggle instead of taking advantage of naive buyers. The housing market would probably regulate itself invisibly capping prices, since buyers would actually walk away from overpriced deals. It also helps if buyers tool themselves up before going out looking for a property.

Take my advice, look out for lower rents, be prepared to rent for a while and wait for interest rates to rise and prices to fall before committing to a mortgage which will leave you with negative equity.

Egg warned that, as consumers take on mounting levels of debt against the rising value of their homes, personal indebtedness could become a serious threat to future stability, especially if interest rates started to rise again…

With the majority of homes now valued considerably higher than their purchase price, homeowners are feeling financially comfortable and ignoring the need to save elsewhere…

This is a dangerous mindset to fall into. A drop in house prices could leave many homeowners financially exposed.”

I will begin with addressing some of the myths that are commonly cited with absolutely no backing, usually by vested interests (VIs) and home owners.

The First Myth: House Prices Always Rise

This is usually the first one pulled out by those VIs who want to motivate you to stretch yourself to get on the first rung of the ladder. Statistics prove the exact opposite. Certain areas will rise and fall depending on age population, land value, attractiveness of the area and changes in infrastructure just to name a few. Below is a graph of average prices in the postcode area I currently live (edited to remove address details):

In the next few months, I intend to explore some of the lies myths surrounding the UK housing swindle market, using multiple sources for my research. It’s a personal journey I’ve been on, from the self-deceptive prosperity teaching, to out of control debts, and finally an awareness of social injustice to the poor.

These reasons are just scratching the surface of what is a huge, growing, financial monster. I’m hoping to pull in as many sources as possible and put them into a concise article right here on Abandon All Fear.

The other evening I met up with a good friend I had not seen for a long time. He was the one who had introduced me to the book Rich Dad, Poor Dad, and I looked to him as a source of inspiration for learning the secrets to getting rich. At the time, it was as the British housing market was taking off. Everyone was talking about getting into property, more so in the church than anywhere else.

The story was different 3 years later. My friend had bought a property in the North, he had lost money on the sale. In fact he wasn’t the only person who lost money on property in my church, there were many buying into housing race and wealth creation, without any financial intelligence or understanding of market forces. Yet the self-propaganda continues amongst many. I listened to my friend tell me that he still thought property would rise, and how it’s still the best place to invest. I listened as he explained to me we have an influx of immigrants coming into the country which is driving prices up. He had a good argument, and 3 years ago my only choice would be to agree. But this time I was ready with some answers…

I agreed that there were many more people coming into the country than going out, however the market itself relies on confidence and the availability of people to buy. There is a limit on how far prices can go up, because there is a limit on people’s incomes. Not enough people can now afford to buy a house, and of those that do, they are stretching themselves to the limit. Bankruptcies are at record levels, and further increases in the interest rate will create millions more. Where bankruptcies rise so do repossessions, and where there repossessions, there is an urgency for the banks to cut their losses and get property off their books = price drop.

As I already stated, all markets work on confidence. Something that my friend could agree with me on is that the best time to sell is when everyone is buying, the best time to get out is when everyone is getting in. Everyone jumped on the property boat and it is now looking like a boat that will capsize.

People are struggling to sell, because they won’t bring their prices down, some are determined to make at least 30% profit, others who bought recently are simply trying minimise loss on their ridiculously priced mortgage. For both of these groups it’s taking them upto 18 months or more to sell, something in itself which would never have been heard of 10 years ago.

All it requires is a loss of confidence in property, just as everyone rushed in and the price shot through the roof. All it requires is everyone to panic and rush out which will have the opposite effect. I intend to present the evidence and show that this scenario is not an ‘if’, but ‘when’.